On February 9, Congress passed, and the President signed into law, H.R. 1892, the “Bipartisan Budget Act of 2018” (the Budget Act, P.L. 115-123). In addition to providing a continuing resolution to fund the federal government through March 23, this 2-year budget contains a host of tax law changes. The Act retroactively extends through 2017 over 30 so called “extender” provisions, provides a number of miscellaneous tax-related provisions, and includes tax relief to victims of the California wildfires and Hurricanes Harvey, Irma, and Maria.
Relief from early withdrawal tax for California wildfire distribution. A distribution from a qualified retirement plan, a tax-sheltered annuity plan, an eligible deferred compensation plan of a State or local government employer, or an individual retirement arrangement (IRA) generally is included in income for the year distributed. In addition, unless an exception applies, a distribution received before age 59½ is subject to a 10% additional tax under Code Sec. 72(t) (the “early withdrawal tax”) on the amount includible in income.
In general, a distribution from an eligible retirement plan may be rolled over to another eligible retirement plan within 60 days, in which case the amount rolled over generally is not includible in income. The 60-day requirement can be waived by IRS in certain situations.
The Budget Act provides an exception to the retirement plan 10% early withdrawal tax for up to $100,000 of qualified wildfire distributions. These distributions are defined as any distribution from an eligible retirement plan made on or after Oct. 8, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, is located in the California wildfire disaster area and who has sustained an economic loss by reason of the wildfires to which the declaration of such area relates. The “California wildfire disaster area” means an area with respect to which, between Jan. 1, 2017 through Jan. 18, 2018, a major disaster has been declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of wildfires in California.
The amount of a qualified wildfire distribution can be repaid (re-contributed) to an eligible retirement plan within three years. A taxpayer will be treated as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution—i.e., eliminating the tax consequence of an income distribution.
Unless a taxpayer elects otherwise, any amount attributable to a qualified wildfire distribution required to be included in gross income for such tax year will be included in income ratably over three years.
Relief for cancelled home purchases. The Budget Act also allows for the re-contribution of certain retirement plan withdrawals for home purchases or construction in the California wildfire disaster area, which were received after Mar. 31, 2017, and before Jan. 15, 2018, where the home purchase or construction was cancelled on account of the California wildfire disaster. A timely re contribution avoids tax on the plan withdrawal. The re-contribution must be made during the period beginning on Oct. 8, 2017, and ending on June 30, 2018.
Eased rules for retirement plan loans. With respect to retirement plan loans to a “qualified individual” (see below) made during the period beginning on Feb. 9, 2018 (the date of the enactment) and ending on Dec. 31, 2018 , the Budget Act: increases the maximum amount that a participant or beneficiary can borrow from a qualified employer plan under Code Sec. 72(p)(2)(A), from $50,000 to $100,000; removes the “one half of present value” of non-forfeitable accrued benefit plan loan limitation; and allows for a longer repayment term in the case of a qualified individual with an outstanding loan on or after Oct. 8, 2017.
A “qualified individual” means any individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, is located in the California wildfire disaster area and who has sustained an economic loss by reason of wildfires to which the declaration of such area relates.
California wildfires employee retention credit. The Budget Act provides a new “employee retention credit” to “eligible employers” in an amount equal to 40% of up to $6,000 of the qualified wages with respect to each “eligible employee” of such employer for such tax year.
An eligible employers is any employer (a) which conducted an active trade or business on Oct. 8, 2017, in the California wildfire disaster zone, and (b) with respect to whom the trade or business described in subparagraph (a) is inoperable on any day after Oct. 8, 2017, and before Jan. 1, 2018, as a result of damage sustained by reason of the wildfires to which such declaration of such area relates. In general, the credit is be treated as a credit listed in Code Sec. 38.
An “eligible employee” is one whose principal place of employment on Oct. 8, 2017, with such eligible employer was in the California wildfire disaster zone. “Qualified wages” means wages paid or incurred by an eligible employer with respect to an eligible employee on any day after Oct. 8, 2017, and before Jan. 1, 2018.
Charitable deduction limitations suspended. Generally, an individual who itemizes can deduct charitable contributions up to 50%, 30% or 20% of AGI, depending on the type of property contributed and the type of donee. (Code Sec. 170(b)(1)) A corporation generally can deduct charitable contributions up to 10% of its taxable income. (Code Sec. 170(b)(2)) Amounts that exceed the ceilings (“excess contributions”) can be carried forward for five years by both individuals and corporations, subject to various limitations and ordering rules. (Code Sec. 170 (d)) For individuals, charitable contributions are deductible only as an itemized deduction.
Qualified disaster-related personal casualty losses. If an individual has a net disaster loss for any tax year:
(A) the amount determined under Code Sec. 165(h)(2)(A)(ii) (i.e., so much of such excess as exceeds 10% of the individual’s gross income) will be equal to the sum of (i) such net disaster loss, and (ii) so much of the excess referred to in the matter preceding clause (i) of Code Sec. 165(h)(2)(A), reduced by the amount in (i) (above) as exceeds 10% of the individual’s adjusted gross income. For this purpose, “net disaster loss” means the excess of qualified disaster-related personal casualty losses over personal casualty gains, and “qualified disaster-related personal casualty losses” means losses described in Code Sec. 165(c)(3) which arise in the California wildfire disaster area on or after Oct. 8, 2017, and which are attributable to the wildfires to which the declaration of such area relates.
(B) he threshold limitation in Code Sec. 165(h)(1) is $500 rather than “$500 ($100 for taxable years beginning after December 31, 2009)”;
(C) the standard deduction under Code Sec. 63(c) is increased by the net disaster loss, and
(D) the AMT adjustment for the standard deduction under Code Sec. 56(b)(1)(E) will not apply to so much of the standard deduction as is attributable to the increase under (C) (above)of this paragraph.
If you have any questions about these extensions and provisions or questions regarding the New Tax Laws passed earlier this year, please contact your Linkenheimer LLP CPA.